By Andrew Housser
No more classes, no more books, no more... debt? For millions of new high school and college graduates, graduation gifts mark the perfect start to a healthy financial life.
For the last two years, the average graduation gift has cost about $50, and cash or gift cards were the most commonly given gifts. A graduate who receives 10 gifts will start the summer $500 wealthier. Show that you are more than just book smart by using gifts wisely.
- Sock it away. Do not rush to spend gift money on a night at the bar with your friends. If the gift is burning a hole in your pocket, allow yourself to spend about 10 percent frivolously. Put the rest in the bank or allow a trusted adult to hold it for you until the urge to spend fades.
- Barter. For most new graduates, cash is most helpful. If you receive gift cards you do not need, consider trading them to family. If your parents are about to refurnish their bedroom, for instance, they might be willing to buy a home store card from you.
- Pay off debt. The average college student has credit card debt of more than $3,000. Paying $500 toward that debt would eliminate one-sixth of the balance. More importantly, you could leverage the $500 gift into savings of more than $2,000 over the next few years. Here is how: At an interest rate of 19.9 percent, the minimum payment on a $3,000 balance might be $90. That debt could take 182 months (more than 15 years) to pay off if you pay only the minimum, and you would pay $3,325 in interest. If you pay your gift of $500 toward the debt, the minimum payment would drop to $62.50. But if you made the same payments that you would have paid on the $3,000 in debt (starting with a payment of $90 per month, the debt would be repaid in 60 months (five years), and total interest paid would be approximately $1,220 -- a savings of more than $2,000. Pay the debt off sooner, and you will save more.
- Start an emergency fund. Deposit cash into an interest-earning account where you cannot instantly withdraw it, but where it is readily accessible in case of emergency. Most new grads will find that $500 will go a long way toward covering a medical issue, sudden car repair, need to buy a job-interview suit or even a plane ticket in case of a family emergency. When you begin working, aim to save 10 percent of your income to build the emergency fund to cover at least six months of living expenses.
- Open an IRA. Anyone can open an Individual Retirement Account (IRA). If you are 18 years old and deposit $500 into an IRA that grows at a 6.5 percent annual rate until you are 67 years old, you will have almost $12,000. If that does not sound like enough, set up an account that allows you to contribute an ongoing monthly savings amount on top of the original deposit. If you can commit to $50 per month, in 49 years, you will have $223,000. If the account is fortunate to grow at an 8 percent annual rate, the balance will become almost $400,000. If and when you are able, also participate in your employer's 401(k) fund to be on the road to healthy retirement savings.
- Invest in a good suit. If you will be going on job interviews or need to look professional at an internship, a quality suit can be a great investment. Go with classic styles and subdued, dark colors so it will endure for several years. Seek advice from someone you respect, and do not be ashamed to bargain-hunt -- you can invest money that is left over.
- Invest in your life. If you will be traveling after graduation, obtain a passport. If you will drive cross-country, a membership in an auto/trip service such as AAA might be useful. If you will be renting your first apartment, gifts can provide a security deposit. Around town, gifts could pay for annual car insurance, a commuting bike or an annual transit pass. The idea is to use the money for things that will get you a step further in life.
Any of these steps can help put graduation gifts to good use -- and help start your independent financial life on the right foot.